HANDELSBLATT EXCLUSIVE

Advisory Firm Hermes to Vote against Deutsche Börse Board

  • Why it matters

    Why it matters

    Deutsche Börse is the latest German company to feel the heat at its annual general meeting, when disgruntled shareholders vent their frustration.

  • Facts

    Facts

    • Deutsche Börse’s planned $27 billion tie-up with the London Stock Exchange (LSE) was blocked by the European Commission in late March.
    • Some investors accuse the management among CEO Carsten Kengeter of underestimating the task and its political implications.
    • They are expected to not approve the management board’s actions at the upcoming shareholder meeting and call for changes to the board.
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    Audio

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Bilanz-Pk Deutsche Börse
Shareholders are not satisfied with Mr. Kengeter's performance. Picture source: DPA

The influential British investor advisory service Hermes plans to vote against the executive board of Deutsche Börse at the exchange operator’s May 17 shareholders meeting, Handelsblatt has learned.

Hans-Christoph Hirt, the head of Hermes EOS, told Handelsblatt that the vote of no confidence was due to an insider trading investigation against Deutsche Börse CEO Carsten Kengeter as well as deficiencies in how he handled the failed merger with the London Stock Exchange.

Shareholders have nothing against taking calculated risks in a merger, Mr. Hirt said, but they expect those in charge to not be politically naive and also to communicate well with the main interest groups.

Critics of Mr. Kengeter say he underestimated the political hurdles that the merger faced in the wake of Britain’s decision to leave the European Union. Mr. Kengeter has acknowledged that he failed to argue persuasively enough in favor of the merger.

Mr. Hirt said it was now up to the non-executive supervisory board, which watches over management, to analyze why the merger failed.

And Mr. Hirt is not alone in opposing the crucial vote at the upcoming annual meeting. The influential US shareholder advisory service Glass Lewis is also telling its customers to vote against the board’s confirmation, citing the failed merger and investigations into Mr. Kengeter.

German authorities are probing the CEO for alleged insider trading in connection to the merger. Mr. Kengeter had purchased €4.5 million ($4.85 million) in Deutsche Börse shares before news of the tie-up became public. Colleagues and spokespeople reject the claims as “groundless” and Mr. Kengeter himself had vowed to disprove the claims.

But with investigations into the manager ongoing, voices asking for changes to Mr. Kengeter’s contract grew louder. As a result, Deutsche Börse’s supervisory board scrapped the extension of the CEO’s contract, which is running out in March 2018.

 

“Due to the management deficits, the supervisory board should lower executive pay for this year.”

Hans-Christoph Hirt, head of Hermes EOS

Shareholders such as Mr. Hirt consider the supervisory board’s recommendation to nevertheless approve the management board’s actions as inconsistent. Critics are calling on the supervisory board to rethink the composition of the management board.

“That should also include the communication deficits on the management side and result in a review over what experiences and skills are potentially lacking,” Mr. Hirt said. “Due to the management deficits, it [the supervisory board] should lower executive pay for this year.”

But Mr. Kengeter, in an interview with Handelsblatt in mid-April, rejected any cuts to his bonus pay, pointing to the exchange operator’s rising net profit in 2016. “I don’t know what bad things I’m supposed to have done for Deutsche Börse,” he said. Deutsche Börse’s shares also experienced a significant upward trend and at €93 currently clock in at their highest price in nine years.

And indeed, some of the group’s main shareholders are much more approving of the management than British Hermes and US Glass Lewis. Ingo Speich, a fund manager at Union Investment said his firm planned to give the green light, as all stakeholders were aware of the possibility that the tie-up could unravel. “To now punish the management for the merger not going through would be the wrong signal. Managers should be allowed to take risks and the decision to try and go for the LSE was the right one,” Mr. Speich explained.

But with the merger off the table, wary investors look at what’s ahead. “Mr. Kengeter now has to prove that he’s also the right chief executive for the future of Deutsche Börse,” the fund manager said.

Daniel Schäfer is head of Handelsblatt’s finance pages and based in Frankfurt. To contact the author: d.schaefer@handelsblatt.com

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